Calculating capital gains on U.S. stocks
Selling U.S. equities? Keep the exchange rate in mind
Q: I hold stocks in two non-registered accounts. One is holding Canadian equities and the other is holding U.S. stocks. When I sell a U.S. stock, the cash remains in the U.S. account.
Since the exchange rate has increased during the time the U.S. account was first set up, how do I calculate capital gains or losses on sold U.S. equities?
— Gary
A: Most investors who have purchased U.S. stocks in the past five years have made money. It sounds like you’re one of them, Gary. U.S. markets have risen steadily, but the U.S. dollar has also taken off in the past two years after a number of years near parity with the Canadian dollar.
Fluctuations in the exchange rate can clearly have an impact on your Canadian dollar returns. As an example, the S&P 500 has returned about 3% in the past year. However, when converted to Canadian dollars, that return jumps to about 20%.
Ask a Planner: Leave your question for Jason Heath »
You calculate a capital gain or loss based on the sale price of an investment less the purchase price of an investment (called the adjusted cost base). Transaction costs also reduce the gain (or increase the loss).
Capital gains and losses are taxable or deductible in non-registered accounts, as you have alluded to, Gary. To the extent that you sell an investment for a capital gain, you report a taxable capital gain and typically owe tax on your tax return for the year. If you sell an investment at a capital loss, you can claim that loss against other capital gains for the year; or if you have none, you can carry the loss back up to three years to offset other net capital gains reported on your previous income tax returns; or you can carry forward the loss to claim against future capital gains.
In the case of foreign investments, you need to determine the cost in Canadian dollars based on the exchange rate at the time of purchase and do the same for the sale proceeds based on the current exchange rate. Exchange rates fluctuate over time, meaning your return in Canadian dollar terms typically differs from the return in U.S. dollars or other foreign currencies.
Ideally, you should keep track of the applicable exchange rates on your purchase of U.S. or foreign currency investments. If you haven’t, Gary, I’d suggest you consider a resource like the Bank of Canada’s 10-year currency converter found here.
It doesn’t matter if the sale proceeds stay in U.S. dollars or get converted back into Canadian dollars in your account. U.S. dollar proceeds, even if retained in U.S. cash, must still be determined in Canadian dollars on your tax return.
From a tracking perspective, you should always monitor your returns in Canadian dollars, because you have to for income tax purposes. From an investment perspective, it makes sense too since you’re living in Canada and spending money in Canadian dollars—so your Canadian returns should be your priority.
Ask a Planner: Leave your question for Jason Heath »
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.
Share this article Share on Facebook Share on Twitter Share on Linkedin Share on Reddit Share on Email
The sale of US equities amounts to $5691.00 gain. This translates into $10 572.00 Canadian for income tax, using a Custom USD exchange rate. What is a custom USD exchange rate and how it it impact the above?
When a stock is purchased and sold in a USD account, does an FX gain/loss need to be recorded in addition to converting the USD purchase and sale price into CAD? The CRA says that an FX gain / loss has occurred when the foreign funds are used to make a purchase, so would the purchase of the stock be a purchase? If this weren’t the case, than would you not double count the FX gain / loss when the USD was converted back to CAD after the stock sale?
Hi David, thank you for the question.
Due
to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected],
where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
This response doesn’t actually answer the question though. Gary was asking how to calculate capital gains on his US investment and an answer would have some mathematics with a brief blurb about the rules along with a side note to discuss with an adviser or accountant.
This answer has none of that as it just reads like a politician answer that sounds like it heard the question, but doesn’t understand that it is a question.
Does the CRA look at recording capital gains or losses in US stocks between a corporation and a personal account differently. Seeing that discount brokerages DO NOT calculate the foreign exchange rates for you it is IMPOSSIBLE to track things on a daily basis. Does CRA not allow you to calculate the exchange rate gains or losses based upon annual exchange rates basis?